The compliant advice process

Gill CardyInsight Consultant (Wealth)

Fact find & risk profile Plan & consider optionsResearch alternativesReport & recommend solutions Implement & review adviceKeep compliant recordsAdviser charge

What is the advice process?

What is Independent?Independent advice is :

a personal recommendation to a retail client in relation to a retail investment product where the personal recommendation provided meets the requirements of the rule on independent advice.

What is the rule?

A firm must not hold itself out to a retail client as acting independently unless the only personal recommendations in relation to retail investment products it offers to that retail client are:

(a) based on a comprehensive and fair analysis of the relevant market; (b) unbiased and unrestricted

The standard for independent advice is intended to ensure that such advice is genuinely free from bias towards particular solutions or any restrictions that would limit the range of solutions that firms can recommend to their clients.

In providing independent advice, a firm should not be restricted by product provider, and should also be able to objectively consider all types of retail investment products which are capable of meeting the investment needs and objectives of a retail client.

What effect will MiFID2 have?

“When advice is provided on an independent basis a sufficient range of different product providers’ products should be assessed prior to making a personal recommendation. It is not necessary for the advisor to assess investment products available on the market by all product providers or issuers.”

The majority of firms providing independent advice will need to be able to provide advice on all types of retail investment products.

A firm could decide that it will specialise in certain financial situations, for example saving for retirement, but that does not necessarily mean that it can rule out in advance advising on certain retail investment products if it provides independent advice. [FG12-15:2.7]

The justification for a firm excluding types of retail investment products from its range needs to be centred on the client.

It may be possible for a firm to conclude for many clients, early on in the advice process, that certain product types are not going to be suitable, and therefore not consider these product types further for those clients.

If a firm cannot or will not advise on a particular type of retail investment product, and that product could potentially meet the investment needs and objectives of new and existing clients, then its advice will not meet the standard for independent advice. [FG12-15:2.15-2.16]

Objective

To create simple, repeatable, compliant [investment] recommendations that can be

managed efficiently over time

AND

simplify the total advice process through pre-planned activity and

system efficiency

ProcessDon’t dismiss a procedures manual!Create standard documents, letters, emails to

cover every eventualityUse agendas and checklists to create

consistency as well as simplicity Follow the pattern

every timeTrain your client

Core Document

Set out :

The firm’s overall philosophy

The firm’s advice process

The firm’s understanding of products

What specific risks each product presents

The firm’s views on other product characteristics

The clients for which you consider any particular product is suitable or unsuitable

Theory

What are the general principles of investing and investment management with which

we are comfortable, which would stand the test of time, and

which we can happily recommend to our clients?

Active? Passive? Core? Satellite? Asset allocation : Strategic? Tactical?Model portfolios? Bespoke strategies?MPT? EMH? Multi-factor models? Growth? Income? Balanced? High risk? Medium risk? Low risk? Balanced? Barbell? Buy & Hold? Rebalancing? Lump sums? Monthly contributions? Charging structures? Costs?

Application

What products and services do we use to deliver our advice proposition and which most closely match our overall business

proposition, our Independent Adviser status

(if applicable) and our personal and business values?

Fund selection? Investment research? In house? Outsourced? Insourced?Advisory? Discretionary?Funds? Multi-manager? DIF? DFM? MPS?Generalist? Specialist? Income tax efficient? CGT? IHT? ISAs for income? Pensions for growth? Income? Growth? Total Return?Risk profiling toolsFund & Manager selection criteria

Service Delivery

Taking into account the resources within our firm

and the resources of our clients, in terms of assets and the impact on the costs

of advice, what mechanisms will we actually use to deliver

the proposition and the selected strategy?

Segmentation by wealth? Or something else? Financial Planning? Life Planning? Target return after tax & charges?Money & Life : how much is enough? Balancing assets? Equalising estates? Wraps? Platforms? Online? Premium service? Basic service? High touch? Low touch? Valuations? Updates? News?Meetings? Frequency?

Other default strategies …

indexing cover?guaranteed premiums? income protection or critical illness? lump sum or income benefits? ISA or pension? invest first or insure first? repay debt or invest?

Research

In general : Suitability Rules!! Client best interests still paramount Distil the product market Client-centred filtering process Many product types are unsuitable Broad enough to meet comprehensive and fair

analysis test Ensure third party research criteria are fair

ResearchIn practice :

Use software to distil the relevant market & identify products that either

don’t meet the clients objectives or

are inappropriate given the firm’s house view

Exclusions must have a valid reason consistent with client’s best interests

Review regularly

Be aware of what’s in & what’s out (and why …)

Factors for CIPs (… or anything else?)

Terms and conditions Charges Range of tax wrappers Type of underlying assets Flexibility and adaptability Provider’s reputation Provider’s financial standing Provider’s own due diligence

Simplifying the Research Process

Q. What is a panel?

A. Providers pre-qualified by research as satisfying a firm’s chosen criteria on suitability

Q. What is a Centralised Investment Proposition?

A. A standardised approach to providing investment advice (including MPS, DIM, DIF)

Platforms Suitability : consider the overall proposition Consider costs, features and benefits The platform is “just” an administrative tool, but

advice on the underlying retail investment products (i.e. pensions, investment bonds, funds, ETFs, investment trusts etc) must meet the tests for Independence where relevant and suitability

Independent advisers should consider platforms which facilitate the universe of investments and packaged products

A firm’s review process should always start with the consideration of the whole of the relevant market in an unbiased and unrestricted way (active, passive, OEICS, investment trusts …)

Passive investments may be suitable for a large number of a particular firm’s customers and that firm therefore recommends passive investments to many of its clients

BUT

Ensure that the recommended passive investment is suitable for each individual client and not assume that passive investments are suitable for all of its clients

Active, Passive & Research

Active, Passive & Panels If a firm’s panel were to consist mainly of [passive

investments] because, after regular review, the firm decides that other products are unlikely to be suitable for the majority of its clients, it should be able to evidence this decision and the justification.

BUT The firm needs to be able to advise on investments

other than [passive investments] if that would be in the best interests of a particular client. Advisers must maintain an awareness of what is and is not included in the panel, so they can identify clients for whom, if necessary, an off-panel solution would be suitable.

Investment Propositions

Should meet the needs, objectives & requirements of target clients

Different solutions for different client segments

Different service levels and features to suit different client requirements

Objective

‘To create simple, repeatable, compliant investment recommendations that can be

managed efficiently over time’

Purpose Building assets under management

Creating profit margin

Building a scaleable business

Removing administration burden

Mitigating compliance risk

Being RDR compliant

But how do these benefit clients?

Potential Criteria Incorporate Finametrica risk profiling tool Asset allocation structure as per firm research Utilise passive funds but with access to ethical too Access a range of tax wrappers Insourced fund research to avoid adviser fund picking Whole of market fund universe A mechanism to rebalance portfolios on a regular basis Bulk switching facility Low cost Clear reporting Regular portfolio reviews Regular strategic & asset allocation update meetings

[source : ValidPath & Parmenion]

What are the restrictions with this solution?

-no transfer in specie

-no ability to bespoke

-limited product links

What is our approach for clients where this approach is unsuitable (and how do we recognise them)?

Summary Identify realistic client segments : your “normal” client

(assets? income? occupation? life-stage?)

Use policy statements : set out reasonable and defensible “default strategies”

Identify “outlier clients” : those who won’t fit in with your preferred approach

Be “mindful” : stay up to date with market & product developments

Technology : research & advice tools are available – use them!!

Audit trail : requirement to demonstrate suitability as important as it ever was – but automate with workflows

Defaqto

“Helping people make better financial decisions”

Founded 1994 Management owned and 100% independent 50%+ of staff have 10+ years’ financial services experience 50%+ of staff have financial services qualifications Research 30,000+ products across 200 categories 4,000 Engage subscribers with 9,000 users

Defaqto – what we do

Supporting AdvisersResearch

(Integrated Tax Wrapper, Funds , DFM, Model Portfolios and Platforms data)

Head office(Create and publish panels & Adviser

Research Support)

Adviser(Capture Client ATR, Client Research

and data access)

Knowledge

Guides / Newsletters

Conferences

Ratings

Panels & Due Diligence

Platform, MM & DFM Partner selection & review

Product and Fund Panel selection & review

Pro

du

ct D

ata

&

Rat

ings

Fun

d D

ata,

Rat

ings

&

Map

pin

gs

Pu

blic

atio

ns

Ad

vise

r En

gage

men

t